Question

# Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset...

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of \$2.9 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate \$2,550,000 in annual sales, with costs of \$808,000. If the tax rate is 35%, what is the OCF for each year of this project? (Enter the answers in dollars. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit \$ sign in your response.)

OCF1 [ ]\$
OCF2 [ . ]\$
OCF3 [. ] \$

First, Calculate the depreciation for three years as follows :

Year 1 = ( 2,900,000 * 30% ) * 50% = 435,000

Year 2 = ( 2,900,000 - 435,000 ) * 30% = 739,500

Year 3 = ( 2,465,000 - 739,500 ) * 30% = 517,650

Now,

Calculation of Operating cash flow for each year as follows :

 Particulars Year 1 Year 2 Year 3 Sales 2,550,000 2,550,000 2,550,000 Less : Costs 808,000 808,000 808,000 Less : Depreciation 435,000 739,500 517,650 Profit before tax 1,307,000 1,002,500 1,224,350 Less : Tax @ 35% 457,450 350,875 428,522.50 Profit after tax 849,550 651,625 795,827.50 Add : Depreciation 435,000 739,500 517,650 Operating cash flows 1,284,550 1,391,125 1,313,477.50

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